Schwab clients withdraw $8.8 billion from Prime funds this week

(Bloomberg) — Charles Schwab Corp . was hit with $8.8 billion in net outflows from its prime money market funds this week as investors scrutinized the brokerage’s resilience amid questions about the health of the broader financial industry.

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Clients pulled cash from two Schwab Value Advantage Money funds, which had a combined $195 billion in assets as of March 15, representing the biggest redemptions in at least six months, according to company data compiled by Bloomberg. The data covers the three days up to 15 March.

Schwab’s own government and treasury funds had inflows in each of the three days, while the prime funds had outflows, according to the company̵[ads1]7;s data.

Prime funds are distinct from sovereign and sovereign money market funds, which have grown in popularity since the financial crisis of 2008 and since the market crash at the start of the pandemic in 2020. Prime funds’ assets fell by $18 billion industry-wide for the week ending March 15, . while overall money market funds increased by $121 billion, according to data from the Investment Company Institute.

Although outflows are a risk, the overall Schwab franchise remains healthy, according to a Bloomberg Intelligence report. “Schwab’s stronger base of mostly FDIC-insured retail deposits is a key support from contagion outflows,” wrote analysts led by Neil Sipes.

Prime fund outflows began after a weekend in which Silicon Valley Bank and Signature Bank failed, and investors scrambled to rate firms including First Republic Bank and PacWest Bancorp. Schwab’s banking unit had $14 billion in unrealized losses in its portfolio of held-to-maturity assets by the end of 2022, prompting company executives to try to reassure investors this week that they have sufficient liquidity to weather market volatility.

“While its greater exposure to fixed income is similar to that of declining SVB, we see the risk of unrealized losses materializing as mitigated by Fed easing and Schwab’s ability to generate liquidity organically,” according to Bloomberg Intelligence analysts.

Schwab’s money market funds are stress-tested for their exposure to interest rate changes and have daily and weekly liquidity levels above regulatory requirements, according to Mike Peterson, a company spokesman. The company’s prime fund has seen significant growth in assets over the past year, he said.

“In a rising interest rate environment, we had clients taking advantage of rapidly increasing yields, and now with market volatility, as we expect, clients are seeking the relative safety of public funds,” Peterson said in an email. “Within our money market funds, we are seeing a rotation from prime funds towards government funds, which is typical in this market environment.”

Schwab’s shares traded as low as $45 on March 13, their lowest intraday price in more than two years. They have fallen about 24% since March 8, as depositors fled Silicon Valley Bank and questions were raised about the broader financial system. The stock fell 2.8% to $57.88 in regular New York trading on Thursday.

The Schwab funds are among the largest prime money funds in the United States, a product that typically invests in securities issued by financial institutions and non-financial companies. Prime funds are a source of capital for many of the world’s largest financial institutions, and the Schwab funds had certificates of deposit from Deutsche Bank AG and Truist Bank as well as certificates issued by units of Citigroup Inc. and Bank of America Corp., according to fund filings.

Investors have rushed into Treasuries and sovereign money market funds in the past week, pushing aggregate mutual fund assets to a record $5.39 trillion as of March 15, according to Crane Data, a firm that specializes in monitoring the industry.

“We are experiencing inflows across the board, generally across all of our liquidity products,” Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes Inc., said in an email. “It seems to be coming from bank deposit products more than anything else.”

(Adds total prime fund output and adds context in fourth and fifth paragraphs)

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